UBS: Which Drillers Can Survive Downturn in Energy Sector?

It is pretty simple math: If North America’s oil and gas exploration and production companies pullback on spending as the economy and energy prices go splat, the companies that help them explore and produce are going to get nailed. But sorting out which service companies will be hit hardest isn’t as straight forward.

But before we get to that, a little mood lighting is in order. UBS Securities Inc. has changed its mind on how much cash North America’s oil and gas players are going to spend in 2009. It now guesstimates a 2% decrease in spending, down from an earlier forecast of a 14% increase. This assumes $105 per barrel of oil, $8.50/Mcfe gas, with credit issues easing “somewhat.” Canada’s 2009 rig count in this scenario will average 398.

But should gas hit $7/Mcfe, and oil trade at $70/barrel, with credit issues remaining or becoming “modestly worse,” spending will fall 13%. Rig count would then slip to 376.

In the brokerage’s “doomsday case,” gas will fall to $6/Mcfe, oil to $50/barrel, and the credit situation will worsen. Result? Spending will slide 25% in 2009, and the rig count would drop to 344. The mood lighting in this corner of the oilpatch isn’t as sexy as it once was.

In the best-case-scenario, the rig count will drop by about 225, or 5%, in 2009, Chad Friess, an analyst at UBS, predicted in a research note Tuesday. In the worst case scenario, up to 600 rigs could be laid down.

Both companies operate fleets positioned in emerging unconventional resource plays where economics are more robust and thus activity levels are less sensitive to commodity price fluctuations.

Hooray!

He added:

However, if the current downturn should deepen, pressure pumpers Calfrac and Trican [Well Service Ltd.] (OTCPK:TOLWF) will be the most impacted due to higher operating leverage.

We estimate that basin-wide, producers require $8.50/Mcfe to realize an economic rate of return on conventional [natural gas] opportunities, far above the ~$6/Mcfe price required for unconventional plays such as the Monteny and Horn River.

Boo!

It takes longer to drill these wells, giving service companies in these regions an edge. He gives Calfrac and Trican the thumbs up for being expose to activity there.